Google founders veer wildly from Buffett playbook

Commentary: DoubleClick price, terms are staggering, even by Net standards

By

JohnShinal

SAN FRANCISCO (MarketWatch) - Maybe Warren Buffett was on the line with his philanthropic partner, Microsoft Chairman Bill Gates, when Sergey Brin and Larry Page tried to call last week.

Or maybe the two Google Inc. founders who once publicly vowed to run their company the way Buffett runs Berkshire Hathaway have decided they no longer need to emulate the Oracle of Omaha, who famously buys assets on the cheap.

How else to explain the $3.1 billion in cash Google agreed to fork over for DoubleClick, the Internet ad services firm?

The price and cash terms that Google agreed to beg the question of who's minding the corporate bank account.

Measured by price-to-expected sales ratio -- the typical metric used by investment bankers to value small companies with little history of profits -- the DoubleClick acquisition is rare indeed.

DoubleClick is expected to post revenue of about $150 million this year, according to a report in the Wall Street Journal. If that figure is accurate, the transaction has a price-to- expected sales ratio of just over 20.

Several weeks ago, this column explained how Cisco Systems Inc.,
CSCO, -0.22%
the most-experienced strategic acquirer of tech firms, had opened its wallet wide when it paid just over seven times expected sales for WebEx.

Cisco agreed to pay $3.2 billion for the provider of Internet business services, such as hosting Web-based video conferences, which sells into markets growing faster than most of Cisco's own. Read the WebEx column here.

If Google
GOOG, +1.20%
were buying into a market that was growing faster than its primary one of selling text-based search ads, the DoubleClick price might somehow be justified.

This is the Internet sector after all, where Yahoo Inc. once agreed to pay more than $5.5 billion for Broadcast.com, a deal whose main achievement was to make Mark Cuban a professional sports mogul.

Depending on whether you count the $1.5 billion in incentives that eBay Inc. promised Skype when it agreed to buy the Internet phone provider in September 2005, that deal was worth between $2.6 and $4.1 billion.

Skype's 2006 revenue expectation at the time, according to eBay and Wall Street analysts, was $200 million.

Excluding the incentives, then, eBay
EBAY, +1.90%
paid as much as 8 times the following year's revenue expectation. Including the incentives, eBay paid even more - 21 times expected sales.

Viewed in that light, the DoubleClick valuation can be rationalized.

But eBay at least managed to get Skype's backers to accept the incentive clauses, as well as $1.3 billion in eBay stock, as payment, thereby forcing Skype investors to accept the risk that if eBay shares fell, the deal would be worth less.

By paying all cash, on the other hand, Google and its shareholders assume all the risk in the deal. And what the return on this cash investment may be is anybody's guess.

Google's board of directors was determined not to see DoubleClick fall into the hands of Microsoft
MSFT, +1.34%
which reportedly also was in the bidding, even if they had to pledge most of the company's bank account to do it.

Hopefully for Google investors, the return on investment of the deal will justify its lofty price.

The value of the DoubleClick purchase is worth almost as much as Google's cash position of $3.54 billion, as of Dec. 31, and Google's $3.58 billion in cash from operations last year.

In other words, every last dollar that Google's search ad business generated last year will soon be in the pockets of private equity investors and a few dozen lucky employees of those two startups. For Google's shareholders, that money is gone out the door forever.

The Skype deal, which has so far been little help to eBay's bottom line, at least pushed eBay into a new market, namely the one for Internet phone services.

Google's purchase, on the other hand, is largely a defensive move.

While Google will no doubt be able to better serve its ad clients thanks to DoubleClick's ad industry connections, it was ALREADY winning the lion's share of revenue growth from the online ad business.

Google leads the fastest-growing online ad market, the one for text-based search ads, and it's expected to post sales growth of more than 60% when it reports quarterly results this Thursday.

By contrast, Yahoo Inc.
YHOO, +0.87%
has been among the leaders in the display advertising market that DoubleClick has focused on, and its top line is expected to grow just 11% when it reports on Tuesday.

The acquisition therefore puts Google into an adjacent market that is currently growing slower than the one it already dominates.

The DoubleClick deal's main purpose has to be seen as a way to prevent Microsoft from positioning itself deep into the market for Internet display ads.

That's playing defense.

And given the valuation Google paid, the DoubleClick transaction will likely go down as one of the most expensive defensive plays ever for a tech firm.

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information. Intraday data
delayed per exchange requirements. S&P/Dow Jones Indices (SM) from Dow Jones & Company, Inc.
All quotes are in local exchange time. Real time last sale data provided by NASDAQ. More
information on NASDAQ traded symbols and their current financial status. Intraday
data delayed 15 minutes for Nasdaq, and 20 minutes for other exchanges. S&P/Dow Jones Indices (SM)
from Dow Jones & Company, Inc. SEHK intraday data is provided by SIX Financial Information and is
at least 60-minutes delayed. All quotes are in local exchange time.